Royal Mail could face industrial action after announcing it will shut its defined benefit pension scheme next year as it said it has become unaffordable.

Members of the company’s existing pension plan will stop to earn future benefits from March next year after Royal Mail said that there was ‘no affordable solution to keeping the plan open in its current form’.

Royal Mail currently pays £400million a year into the pension plan, but it said that it could more than double to over £1billion next year. Despite the scheme currently in surplus, Royal Mail expects this to run out in 2018.

Pension plan closure: Royal Mail currently pays £400million a year into the pension plan

The Communication Workers Union ‘strongly condemned’ the decision and said that any unagreed pension changes ‘will be met with the strongest possible opposition’, including a ballot for industrial action.

CWU acting deputy general secretary Ray Ellis said: ‘Although Royal Mail’s own consultation exercise revealed massive opposition to its closure plan, the company has decided to ignore the views of its workforce and proceed with closure without consent’.

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He added: ‘We will not stand by and watch the company abandon the pension promises it made at the time of privatisation which threatens our members with massive cuts to their future pension benefits and insecurity and poverty in retirement’.

Royal Mail’s decision comes after a consultation in January with staff as well as the CWU, which had already threatened strike action .

Workers with a defined benefit scheme have a guaranteed income for life based on their final salary or career average pay, with the income usually adjusted for inflation.

Royal Mail is now looking to switch workers to a stock market-linked defined contribution plan.

This would see the company and employees pay into a pension pot with no guarantees as to the payout.

Royal Mail is looking to switch workers to a stock market-linked defined contribution plan

Shares in the group rose 1.9 per cent following the announcement. In late morning trading they lost some gains, trading 0.5 per cent, or 2.1p higher at 421.30p.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: ‘Royal Mail’s current contributions to this scheme alone are about 10 per cent of total salary costs, including wages of staff who are not members of the scheme.

'These were expected to more than double to over £1billion in 2018, equivalent to around 25 per cent of the group’s entire 2015/16 UK wage bill.

‘However, with a highly unionised workforce, which has in the past shown itself willing to flex its muscle in defence members’ rights, introducing an alternative plan is likely to prove costly.

‘Whether those costs will be in the form of chunky employer contributions to a new defined contribution scheme or lost revenue from industrial action remains to be seen.’

Analysts at the stockbrokers Liberum said that in their view, the best scenario for Royal Mail is a settlement that costs close to the current £400million per annum.

‘The worst scenario would see Royal Mail agree to annual contributions materially higher than £400m, which we consider unlikely,’ they added.